The Ethics of Shareholder Value: Duty, Rights and Football
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WestminsterResearch http://www.westminster.ac.uk/research/westminsterresearch The ethics of shareholder value: duty, rights and football Donald Nordberg Westminster Business School Westminster Business School, University of Westminster Working Paper Series in Business and Management Working Paper 11-3 June 2011 © University of Westminster The WestminsterResearch online digital archive at the University of Westminster aims to make the research output of the University available to a wider audience. Copyright and Moral Rights remain with the authors and/or copyright owners. Users are permitted to download and/or print one copy for non-commercial private study or research. Further distribution and any use of material from within this archive for profit-making enterprises or for commercial gain is strictly forbidden. Whilst further distribution of specific materials from within this archive is forbidden, you may freely distribute the URL of WestminsterResearch: (http://westminsterresearch.wmin.ac.uk/). In case of abuse or copyright appearing without permission e- mail [email protected] WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT WORKING PAPER 11-3 June 2011 The ethics of shareholder value: Duty, rights and football Donald Nordberg University of Westminster Correspondence Donald Nordberg ([email protected]) Westminster Business School University of Westminster 35 Marylebone Road London NW1 5LS, UK ISBN ONLINE 978-1-908440-02-0 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3 The ethics of shareholder value: Duty, rights & football Donald Nordberg Westminster Business School, University of Westminster Abstract How does a board of directors decide what is right? The contest over this question is frequently framed as a debate between shareholder value and stakeholder rights, between a utilitarian view of the ethics of corporate governance and a deontological one. This paper uses a case study with special circumstances that allow us to examine the conflict between shareholder value and other bases on which a board can act. In the autumn of 2010 the board of Liverpool Football Club sold the company to another investing group against the wishes of the owners. The analysis suggests the board saw more than one type of utility on which to base its decision and that one version resonated with perceived duties to stakeholders. This alignment of outcomes of strategic value with duties contrasted with the utility of shareholder value. While there are reasons to be cautious in generalizing, the case further suggests reasons why boards may reject shareholder value in opposition to mainstream notions of corporate governance, without rejecting utility as a base of their decisions. Keywords: Corporate governance, Boards, Ethics, Pragmatism, Shareholder value, Liverpool FC. Introduction In 2010 a strange event occurred in a corner of the world of corporate governance: The board of directors of a sizeable enterprise in the UK fired the owners. The event attracted wide coverage in the news media, providing a rare public glimpse into The ethics of shareholder value 1 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3 corporate governance operating in the raw. What the incident revealed made intriguing reading for sports fans around the world, throwing up a cast of characters with heroes and villains, a real-life boardroom soap opera, the modern-day equivalent of a morality play. But the lessons we can draw from it, about the ethics of corporate governance and the role of company directors are larger and more nuanced. Liverpool Football Club got new owners and hope for salvation from a forced descent from the English Premier League. Away from the hype of the headlines, a more mundane set of concerns arise: The incident suggests that directors do not, in practice, or at least in this case, put their allegiance to shareholders above all. The case raises questions about the nature of shareholder value, which lies at the heart of much of the academic literature and public-policy debate over corporate governance around the world during the past several decades. It offers a rare chance to analyze a key issue, how in practice directors see their governance role, in quite a pure form, through a case that strips away much of the messy complexity of public corporations and various categories of institutional investors and focuses attention instead on the relationship between boards and owners. At work in this case is a different logic, a different ethic, from the one prescribed in much of the literature on corporate governance, one with implications for how business people use ethics to inform their judgements. This essay considers first the background of the case and the corporate governance issues it raises and then reviews what the literature tells us about the role of boards and owners. It considers how longstanding debates in ethics give shape to the work of boards of directors, independently of law and regulation, and how in particular utilitarian approaches to board ethics have clashed with duty-based perspectives. The ethics of shareholder value 2 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3 The evaluation of the case suggests that in practice the board of this company chose what it felt was the "right thing to do" once the duty and utility became aligned in purpose, a purpose that remained at variance with notions of shareholder value that lie at the heart of many normative views of corporate governance. It concludes with observations about the limitations of generalizing from this case to the wider world of corporations, but also with reasons why this pure case resembles closely the model of corporate governance that the mainstream literature describes. Ownership of Liverpool FC As it entered the 2010-11 season Liverpool FC had won 18 championships in the top English football league – tied with its arch rival Manchester United for the lead – but none in the last 20 years despite regularly finishing in the top four and competing in the top European club competition. The case was widely chronicled in the UK press and in statements from the club itself (e.g. Eaton, 2010a, 2010b; Gibson, 2010; Liverpool FC, 2010; R. Smith, 2010; S. Smith, 2010). In February 2007, the club came under the ownership of two American investors, Tom Hicks and George Gillett, in a deal that valued the club at £219 million. Hicks, a venture capitalist, had experience of sports franchises; Gillett owned the Montreal Canadiens hockey team. Together they promised to revive Liverpool FC with investment in a new stadium and in players to secure its place at the very top of English football. The financing method they adopted was similar to their experience in managing other sports franchises: borrow money on the promise of future revenue streams and maximize the yield to shareholders by keeping equity investment to a minimum. Royal Bank of Scotland made the loans to finance the deal. The ethics of shareholder value 3 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3 The two owners soon fell out with each other, leaving the club without direction or the planned further investment, just as the global financial crisis swept RBS into its maelstrom. Performance on the pitch was good but not great, and the club found it difficult to compete for new talent against rivals like Chelsea, Real Madrid and latterly Manchester City, with seemingly unlimited funds available from wealthy owners who cared little if not at all about the cost. By the autumn of 2010, with the loans coming due for repayment and RBS unwilling, perhaps even unable to extend the term, the club teetered on the brink of slipping into administration, a form of bankruptcy. The board tried to negotiate the sale of the club to a series of other investors, without success. The turmoil unsettled the team. Seven games into the new season, Liverpool sank to near the bottom of the Premier League, having won only one match and gained only six points. Under league rules, Liverpool FC would have nine points deducted if it went into administration. That would give it a total for the season to- date of minus three, making the threat of relegation next season to the second tier of teams palpable. If that happened, the club would lose tens of millions of pounds in television revenues; key players seemed certain to leave even before that. This path would clearly be bad for the club, bad for the supporters, and probably bad for football. Fans assailed the owners for their actions and inactions, for betraying the proud traditions of the club – their club, the fans' club. The board felt urgent action was needed. After various suitors pulled out of proposed deals, the board was left with a decision: the most viable alternative to administration was to sell the club to another American sports investor, John Henry, through his company, New England Sports Ventures. But there was a catch: Henry's offer, worth about £300 million, was sufficient only to pay off the debt and accrued interest on the The ethics of shareholder value 4 WESTMINSTER WORKING PAPER SERIES IN BUSINESS AND MANAGEMENT, PAPER 11-3 loans to RBS. Hicks and Gillett would receive next to nothing. By a vote of 3-2 the board approved the sale of the club to Henry. The dissenting votes were from Hicks and Gillett. Hicks and Gillett then sought to have two board members removed and replaced with their own associates. The chairman Martin Broughton, who was also chairman of a major listed company, argued that he had joined the Liverpool FC board on explicit written agreement that he should try to find a buyer. Christian Purslow, managing director, joined the board to put the club's finances in order. Moreover, Broughton insisted that he and only he could remove members of the board.